When the SEC announced its case against Goldman this morning, the Commission’s Director of Enforcement, Robert Khuzami, happened to be at the same New Orleans conference as this columnist. I’ll have more thoughts after I’ve had a chance to read the complaint. In the meantime, I thought I’d share some notes from the question/answer session he did with those of us in the mini press corps on hand.
Here’s the tape from CNBC. Your correspondent was off to Khuzami’s right…
1. How is this different than any other synthetic CDO? All of them are structured with a short on the other side.
He said there’s a difference between just going short and going short while simultaneously picking the bonds that are in the deal. The securities fraud occurred when Goldman failed to disclose the role Paulson played picking the bonds.
2. There are likely many other cases of subprime shorts directing the structuring of CDOs. Magnetar is one. But there are guys mentioned in Michael Lewis’s book, and many others besides Paulson. If the SEC is targeting Goldman for failing to disclose the role shorts played in this deal, will it target other banks who may have similarly failed to disclose?
He said they’re looking at a wide range of products … If they see securities with similar profiles, they’ll look at them closely.
3. According to e-mails in the complaint, ACA was communicating with Paulson and had final say about bonds went into the deal. So is it really that misleading to tell investors that the bonds were selected by an objective third-party manager?
Paraphrasing Khuzami’s response: ACA wasn’t really an objective third-party constructing the portfolio, as promised by offering docs, since Paulson was so heavily involved.
4. What about the SEC’s reputation? After the BofA blowup, it will look pretty bad if this prosecution fails.
Paraphrasing: Our job is to investigate and bring cases and that’s what we’re doing here.